by Frank Schnittger
Sun Aug 20th, 2017 at 08:57:59 PM EST
My central expectation, repeated in numerous blog posts and comments since the referendum, is that we will see a hard Brexit (defined as one without a substantive Brexit or post Brexit trade deal) accompanied by at least a 30% devaluation of Sterling relative to the Euro.
Faced with such a devaluation EU policy makers will have little option but to impose tariffs on imports from the UK, if only to preserve the competitiveness of the EU's own industries. If the UK retaliates with tariffs of its own, a hard Brexit will result in a trade war, even worse than the worst case scenario of "no deal" Brexit Pundits, all of whom seem to expect standard WTO tariffs to kick in at that stage.
My point has always been that WTO tariffs have to be negotiated, and there simply isn't any automatic process by which some default set of tariffs will kick in once the UK leaves the EU.
But the 30% relative devaluation figure was always a "finger in the air" guess. It now looks as if I might have been too conservative in my prognostication. Sterling has already declined from 77P to the Euro to 91P to the Euro - a devaluation of 18% since the referendum. Morgan Stanley are now predicting that the euro will trade at £1.02 by the end of the first quarter of 2018 - a total devaluation of 32.5% - and that is before we even know the exact shape that Brexit will take...
Sterling devaluation has already wiped out several Irish mushroom producers, and the Irish Agri-food business - heavily dependent on the huge UK food market - faces collapse when Sterling approaches parity with the Euro.
The obvious solution - diversification into EU27 markets - is difficult as those markets are already saturated, and emerging markets such a China are a slow burn, at best. The reality is that Brexit has effectively already happened for many Irish food producers tied into Sterling denominated contracts, and the only solution, ironically, might be a very hard Brexit which effectively blocks UK agricultural exports into the EU27, enabling Irish exporters to take their place.
At the moment the UK does effectively have its cake while eating it, with an 18% devaluation enhancing UK competitiveness even as the prospect of Brexit takes it's toll on business investment and consumer confidence. UK tourism to the Republic of Ireland is already down by 4% even as tourism from the rest of the EU and the Americas booms.
For Irish business, particularly in the agri-food sector with its traditionally tighter margins, Brexit is no longer some hard to define future threat on the horizon. It is a reality now.
While the Irish government has been arguing for as soft a Brexit as possible to ameliorate damage to North south trade and the peace process in Northern Ireland, it may soon be forced to argue for a much tougher EU stance: one which effectively bars UK agri-food exports to the EU.
Watch this space.